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Hong Kong
The Financial Services and the Treasury Bureau and the Hong Kong Monetary Authority today paved the way towards creating a regulations for stablecoin issuers in Hong Kong.

“Stablecoins” are a type of cryptocurrency where the value of the digital asset is supposed to be pegged to a reference asset, which is either fiat money, exchange-traded commodities, or another cryptocurrency.

Commenting on its two-month consultation that ended in February 2024, the organisations said the “vast majority” of respondents agreed that with the increased prevalence and evolving development of virtual assets (VAs), a regulatory regime should be introduced for fiat-reference stablecoin (FRS) issuers. The regime should enable “proper management of the potential monetary and financial stability risks, as well as providing transparent and suitable guardrails”, the bodies said in a statement. 

Stablecoins have been controversial. In 2022, two main stablecoins from the crypto project Terra collapsed, prompting the Group of Seven club of industrialised nations to raise the alarm about the crypto and digital assets space more generally. Terra dollar sister token Luna fell dramatically. PGIM, investment arm of US-listed Prudential Financial, warned in 2022 that cryptocurrencies such as bitcoin were a “poor choice” for long-term investors and make portfolios riskier and more volatile.

The drama came at a time when digital assets – a term covering a variety of entities ranging from cryptocurrencies to tokens and smart contracts, have become more “mainstream,” gaining business from wealth managers, banks and other regular institutions.

Hong Kong, as explained in this article, is seeking to capture a slice of the market as it works on reviving its fortunes as an international financial hub, following the disruptions of the pandemic and geopolitical change.

“In addition to the existing regulatory regime for VA trading platforms, the establishment of a licensing regime for FRS issuers will further strengthen the VA regulatory framework in Hong Kong in line with international standards and effectively mitigate possible financial stability risks associated with FRS issuance activities,” the Secretary for Financial Services and the Treasury, Mr Christopher Hui, said.

The FSTB and the HKMA said a bill will be introduced into the Legislative Council as soon as possible.

“We believe that introducing a regulatory regime for FRS issuers to facilitate proper management of the potential monetary and financial stability risks, while providing transparent and suitable guardrails, is a highly suitable and effective approach,” ZA Bank, which operates in the stablecoins space, said. “This will contribute to the sustainable and responsible development and promotion of stablecoins, as well as the thriving web3 ecosystem, in Hong Kong.”

“We also agree that safekeeping reserve assets with licensed banks in Hong Kong can offer enhanced user protection in the event of FRS issuers’ business disruptions or failures,” she said. 

Other reactions
“This announcement is an important part of Hong Kong’s position as a virtual asset hub. Stablecoins are an increasingly popular means of payment and have the potential to become an important part of the financial infrastructure in the future,” Paul McSheaffrey, senior banking partner, Hong Kong, KPMG China, said. “A key concern of users of stablecoin, and a barrier to more widespread adoption, is a lack of trust in the backing of the stablecoins.”

“The requirements of the new regulation around requiring fiat assets to back stablecoins and for that to be monitored by the regulator will remove that barrier enabling more widespread adoption. Regulating stablecoin issuers provides confidence for both issuers and users of stablecoins which should spur the innovation and development of practical use cases in Hong Kong, giving Hong Kong a central role in development of the future financial infrastructure,” McSheaffrey added.